The Sequester, and How Not to Solve a Budget Problem

Federal spending is going to be cut by $1.1 trillion over the next decade, starting this weekend. Neither party is happy about it, and almost everyone thinks it's a bad idea.

Want to learn more? Good, let's go.

The "sequestration," as it's called, was originally agreed upon in the summer of 2011 as part of the deal to raise the debt ceiling. Both parties agreed on the spending cuts, but neither actually wanted them to happen. The idea was to threaten indiscriminate spending cuts both sides would hate, hoping it would entice legislatures to work together to find a more amicable solution to lowering the budget deficit. They didn't, and so now here we are. It's as if you and your spouse made a commitment that if you couldn't agree on who cleans the kitchen tonight, you'd both vow to smash your own fingernails with a hammer, hoping it would push you toward an agreement. Now the kitchen is still a mess, the clock is ticking, and the hammer awaits. Only politicians can think of this stuff.

Narrowing the deficit may be an admirable goal, though be careful what you wish for, as Europe is now realizing. What's crazy about the sequester is the composition of the cuts. Nearly all of the cuts hit "discretionary spending," which basically means everything except entitlements like Social Security, Medicare, and Medicaid. Education, justice, science, road repairs, and air traffic control all get cut. Social Security gets a pass.

Roger Altman of Evercore Partners explained how mindless that logic is in the Financial Times this week:

Cutting discretionary spending is like invading Iraq when the attack came from Afghanistan. Everyone knows that the federal spending problem involves the soaring cost of health care entitlements, which are not covered by the sequestration. The share of US gross domestic product consumed by Medicare alone is projected to rise from 3.7 per cent today to 6.7 per cent in 25 years. Meanwhile, discretionary spending is declining as a share of economic output, and it is already being subjected to a $1.1tn 10-year cut that was initiated in 2011.

Basically, the sequestration leaves everything that is growing alone, while cutting everything that is already declining.

Here's one way to look at it:

Source: Congressional Budget Office.

Social Security spending is set to jump over the next two decades. The sequester leaves it alone. Medicare is set to balloon. The sequester pokes at it, but not enough to make a difference. Medicaid spending is set to explode. The sequester won't touch it. "Other" spending is already set to decline substantially -- and that's where the sequester's biggest cuts will hit.

And the discretionary spending cuts are indiscriminate. Here's Altman again:

Each area of the discretionary budget will be forced to share the cuts equally. How bad is this? Imagine a hospital deciding to cut every department by an equal amount. Oncology and cardiology would be reduced as much as cosmetic surgery. No medical institution would ever do this. Life-or-death areas would be cut last.

Museums and national parks will receive the same percentage cut as education and the FBI. Nuclear regulation is cut by the same percentage as the Library of Congress. It makes no logical sense. And again, that was by design.

Non-defense discretionary spending is already on track to hit its lowest share of GDP in more than half a century. Defense spending, while monstrous compared to the rest of the world, is actually below its historical share of the economy, and already set to decline further as the war in Afghanistan draws down. The only major budget categories growing above historic norms are entitlements like Social Security and Medicare. Yet they are the only areas we seem unwilling to cut.

Worse, they are indeed the hardest government service to cut, as virtually everyone benefits from them directly. Whenever the topic of entitlements and deficits arises, someone points out that entitlements don't add to the deficit because they are paid for separately. This is nonsense. Yes, you paid into the entitlement system. But you are likely set to receive multiple times back what you put in, adjusted for inflation and discounted to present value. Pretending that entitlements don't add to the deficit doesn't help the fact that they do, accounting for virtually all of the long-term deficit projection. It is entirely misinformed to want to stem the long-term budget deficit while asking for entitlements to be left alone.

There is no budget crisis today. Someday, there will be. If the sequester is any indication of how we plan to address it, we're in trouble.